Should the West Keep the Soviet Economy From Toppling?The West Won't Be Wasting Its Money, Say the Reform-for-Aid Plan's Authors

THE DEEPENING economic crisis in the Soviet Union has brought Soviet and Western leaders to a historic fork in the road: Reform the Soviet system or watch it collapse into chaos.

Continued half-hearted Soviet economic reform will turn today's decline into tomorrow's free-fall. Economic collapse will not only undermine democratic reform, but also likely lead to the disintegration of the Soviet Union, perhaps with violence.

Such instability is not in the long-term interests of the Soviet Union or the United States and its allies. In talks just completed in Moscow with President Mikhail Gorbachev and other leaders, we have urged that the Soviet Union and the West develop a joint program of step-by-step initiatives each would take if the other were prepared to act -- the so-called Grand Bargain.

The Grand Bargain is not a giveaway of Western resources, nor is it a giveaway of Soviet independence or sovereignty to the West. It is not an attempt to subsidize Soviet inefficiency. It is neither pro-Gorbachev nor pro-Boris Yeltsin, not pro the center vs. the republics. Nor is this a program to prop up a tottering, corrupt communist system. That system cannot be reformed. It must be replaced.

The plan we propose is pro the process of democratization and rapid transition to a market economy. The Soviet participants would consist of republics who have voluntarily signed a fundamental treaty of union. They would act in sustained cooperation with the central government and the West.

The central concept is long-term strategic interaction and support by the West on a step-by-step and strictly conditional basis only if the Soviet participants take unequivocal steps toward democracy and a market economy.

The plan is not an unconditional commitment of Western assistance. Rather, it is contingent upon fulfillment of mutually agreed, measurable tasks.

If union and republic leaders choose democracy and market economy, the West must decide whether or not to aid the reforms in a way that maximizes success. The strategic concept we propose is active Western engagement that would help the transformation of the Soviet Union into a normal, civil society and its integration into the international community and world society.

To do this requires shattering traditional thinking on both sides. Conceptual transformations are rare in the lives of individuals; rarer still for nations. But such a transformation has already occurred in Soviet foreign policy. Witness events in Eastern Europe, the reunification of Germany, the resolution of regional disputes in Afghanistan, Cambodia, Central America and Angola, the unprecedented cooperation of the Soviet Union and the West in the Persian Gulf and most recently the formal dissolution of the Warsaw Pact.

If the West is prepared to engage deeply, we believe equally deep transformations can occur in favor of democracy and a market economy. The recent history of Eastern Europe suggests that without sustained, coordinated and decisive Western cooperation and assistance, the Soviet Union's chances of a successful and rapid transformation will be low.

The Soviet Union achieved a critical political milestone on April 23 with completion of the "91" agreement between Gorbachev and the leaders of nine of the 15 republics. Those initialing the agreement accepted power-sharing among sovereign republics, including the right not to join the new union. With a new union treaty, a new constitution and new free elections for national offices will follow.

Our proposal, the "Joint Program for Western Cooperation in the Soviet Transformation to Democracy and the Market Economy," aims to create a normal market economy in the Soviet Union in the shortest possible time.

The proposed program builds on the six recognized pillars of a market economy: Private property, ownership and enforceable contracts; stabilization of the macroeconomy; liberalization of prices; privatization of enterprise; opening the economy to international market forces and liberalization of trade; and limitation of governmental intervention in the economy.

The proposed time period would begin this summer and run through 1997. From the summer of 1991 to early 1992, the Soviet Union would fulfill the 91 democratization schedule; become a special associate member of the IMF and World Bank and begin negotiation of a comprehensive program for economic reform with substantial Western cooperation; sharply reduce budget deficits by cuts in subsidies, foreign aid and military spending; liberalize prices on luxury goods; and begin rapid privatization of small enterprises and farm land. Western assistance would consist of food and medicine.

Major market reform and stabilization would come in 1992, and include a balanced budget through deep reductions in subsidies and expenditures; freeing of virtually all prices; establishment of the basic legal and economic framework of the market economy and elimination of legal restrictions on private economic transactions; acceleration of privatization; and creation of a framework for foreign direct investment with special emphasis on natural resources.

In 1993 would come consolidation of stabilization, the beginning of large-enterprise privatization and profound structural reforms including the development of financial markets, demonopolization and the removal of barriers to entry and intensified conversion of defense industries to civilian production.

From 1994 to 1997, basic macroeconomic reform and structural adjustment continue with the goal of creating by 1997 a normal market economy similar to Western Europe's, where the private sector produces the greater part of national income. This economy would be integrated into international trading relations. Generally accepted methods for regulating the flow of goods, capital and services between the Soviet Union and the rest of the world would be in place.

In principle, the Soviet Union could undertake such an economic reform program by itself. But the scope and difficulty are unprecedented. Therefore, substantial Western cooperation, including financial assistance, is almost certainly necessary for success in a rapid and politically acceptable transition to a market economy.

The accelerating economic collapse makes the need for reform, as well as support, both urgent and critical. Only Soviet leaders can make the fundamental choice for transformation to a market economy. If this is their chosen goal, then we face many specific questions about how to reach this destination. To expect them to answer such questions in the absence of intense, sustained collaboration with experts from the international community is unrealistic.

International financial institutions should be asked to take the lead in working with Soviet and republic governments to refine a program for transformation suitable for Western assistance and investment. Funds from international institutions -- the IMF, the World Bank and the European Bank for Reconstruction Development -- and Western governments would be earmarked not for general assistance but rather for specific purposes, including balance of payments assistance during price liberalization, a currency stabilization fund for the transition to convertibility, and private enterprise funds to foster the development of private business. Specific calculations concerning financial needs would be left to the international agencies as reform proceeded. The shared annual budgetary cost to the largest Western economies would be modest. The step-by-step and strictly conditional character of the program should relieve Western governments and international institutions of worrying about squandering their resources. If reform stops, so does assistance.

The concept of strategic interaction is not new. It motivated the Marshall Plan. Forty years ago, intense cooperation among Europeans stimulated by generous U.S. assistance, helped create peace and prosperity of which earlier generations could only dream.

Now a similar window of opportunity has opened. With the Iron Curtain lifted, the political and economic institutions that created peace and stability in Western Europe can finally expand eastward if Soviet and Western leaders act together.

Graham Allison and Grigory Yavlinsky co-chair the Joint Working Group on Western Cooperation in the Soviet Transformation to Democracy and the Market Economy. Dr. Allison teaches government at Harvard and directs its Strengthening Demcratic Institutions Project. Dr. Yavlinsky is director of EP Center and a former first deputy prime minister of the Russian Federation.

GRAPHIC: ILLUSTRATION, PETER HOEY

2 of 2 DOCUMENTS

The Washington Post

July 7, 1991, Sunday, Final Edition

SECTION: OUTLOOK; PAGE B3

LENGTH: 1251 words

HEADLINE: Should the West Keep the Soviet Economy From Toppling;

Won't the Soviets Use the Aid to Preserve A Failing System? There's a Better Idea

SERIES: Occasional

BYLINE: James L. Hecht

BODY:

IS THE Grand Bargain really a window of opportunity to a new world order, as its sponsors claim, or would economic aid to the Soviet Union be a waste of taxpayers' money, as critics say? Would billions in aid help move the Soviets to a democratic society and a market economy?

The answers depend on how the aid is given. If, as proposed by the Harvard group, the aid is money for balance-of-payments relief and currency stabilization now, the money will be wasted. However, a massive program to train Soviet managers, coupled with a program to subsidize joint ventures between U.S. companies and Soviet partners, would be very effective.

Effective aid must be based on reality, not dreams, and the reality is that the Soviet Union is many years away from a working market economy. That does not mean certain reforms should not be adopted now, such as some privatization, legal protection of property and additional price reform.

But a market economy cannot succeed in a country where hardly anyone understands how the free enterprise system works. In addition, very few Soviet enterprises are capable of competing with businesses in the industrial nations, and steps such as privatization and price reform, by themselves, will seldom make Soviet enterprises competitive. In a market economy there is no market for inferior products based on outdated technology. As we have seen in eastern Germany, where quick economic reform has idled one-third of the work force, competitiveness requires not only reform but large investments.

To understand the level of the management training that will be required, it is necessary to have a feel for the magnitude of the problem. In an article in January's Harvard Business Review, Jeffrey Hertzfeld, an attorney with more than 20 years' experience representing Western companies in the Soviet Union, observed, "There probably aren't 300 Soviets out of 300 million who know how to read a P&L [profit and loss] statement." When Robert Schmidt, a vice president of the Control Data Corp., tried to negotiate an agreement in which the Soviets would partially pay for Control Data products with Soviet-made greeting cards, the Soviets insisted they receive the retail price.

But addressing such problems is only part of the need. Soviet managers have developed skills in purchasemanship but not salesmanship: Securing supplies and services was very difficult, but it never was necessary to sell anything. Innovation was stifled because there was little reward for major improvements, but careers were ruined if a production quota was not met. There was little incentive for a Soviet manager to decrease costs or improve quality, but securing recreational facilities for employees helped a manager's career.

In the West a key to successful management is to develop alternatives and then make the best choice. But Soviet society seldom offers choices and managers are not prepared to deal with alternatives.

Soviet managers are not going to function effectively in a market economy after a one-week seminar. Their unpreparedness is far greater than those from the Eastern bloc countries where 40 years of communism was not enough to wipe out the pre-communist business culture. With the exception of the Baltic republics, which account for less than 3 percent of the Soviet population, 70 years of communism has left almost no remnant of a market culture in the Soviet Union.

How to train managers efficiently is a challenge to American business-school educators. I believe a four-month program would be the shortest that would be effective. For future Soviet business leaders, two years would be desirable. Necessity requires providing most of this training in the U.S.S.R. with visiting lecturers, but we also should bring large numbers of Soviets here to experience our business culture and way of life. To the extent possible, those coming to the United States should have classroom training supplemented by internships with American companies.

Another way to provide effective aid now is to subsidize joint ventures. Encouraging joint ventures to create world-class Soviet production enterprises is of utmost importance; a market economy will not succeed in a country without competitive businesses. Joint ventures can provide the capital, technology and know-how the Soviets need.

Although joint ventures have been possible since 1987, relatively few have been formed. In part this is so because the Soviets do not understand the requirements Western companies have for risk capital; the Soviets also fear exploitation by foreign partners. U.S. government subsidies for joint ventures could ease some of this worry, and give American companies help in the bargain.

Subsidies could be created by offering tax rebates on U.S. earnings to companies with approved foreign-currency investments in the Soviet Union. The rebates, perhaps $ 2 billion annually, could be auctioned quarterly ($ 500 million at at time) under various conditions that would reward ventures requesting the lowest percentage of U.S. government support.

Interested companies would bid for the rebate they needed to make an investment. An advantage of this proposal is that the ventures getting aid would be determined by market conditions rather than government bureaucrats.

I completed a study in 1990 which indicates that U.S.-Soviet joint ventures would usually be world-class enterprises. In 35 Soviet plants that had licensed technology and know-how from 19 U.S. companies, product quality was at least as good as in the West in 76 percent of the plants, and most of the quality problems in the others were caused by inferior materials from plants using Soviet technology. About 85 percent of the plants using U.S. know-how had yields at least as good as those in the West. These 35 plants were located throughout the Soviet Union. About half manufactured chemicals or petrochemicals; the others were a broad mix, including three food-processing facilities and four machine or instrument makers.

My study showed that the two plants with the most labor intensive operations had high rejection rates. However, the study was completed before McDonald's opened in Moscow. George Cohon, chairman of McDonald's Restaurants of Canada, the foreign joint venture partner, has said the Moscow employees are among the best workers in the McDonald's system. McDonald's success is based on careful selection, extensive training and incentives based on performance.

Lures to foreign investment are that the Soviet Union has more natural resources than any other nation, a well educated workforce and a huge internal market. With economic aid the Soviet economy could improve rapidly by emphasizing key goals, such as improving oil recovery and applying technology to prevent spoilage of food and grain. However, rapid economic growth also will require discipline: working harder and investing most available hard currency.

The benefits to the United States of giving the Soviets economic aid far outweigh the costs. In fact, the aid could be financed by a fraction of the savings in U.S. military spending which could result from agreements on arms control and political cooperation as part of a Grand Bargain that matched rhetoric with substance.

James Hecht heads the Project for the Study of the American Future at the University of Delaware. His book, "Rubles and Dollars: Strategies for Doing Business in the Soviet Union" will be published this fall by Harper Business.